Psychology & economics

I have to say that I really enjoy academic literature reviews – so many insights in so little space! An excellent recent find was Stefano DellaVigna’s “Psychology and Economics: Evidence from the Field,” which is more or less a short treatise on how to think about and test hypotheses in behavioral economics. Whilst some of the points covered were essentially quantifications of easily observable phenomena (such as hyperbolic discounting), there were two that struck me in their phrasing and their implications for microfinance:

Attention is a scarce resource. This makes intuitive sense, but I found it a pithy description of a fact that we too often neglect when trying to communicate with others. Another good insight was that “consumer inattention to non-transparent [costs] is substantial.” This to say that we tend to anchor our purchasing behavior on the costs that are most prominent, or even literally visible to us. For instance, most US shoppers do fully understand that sales & excise taxes will be added on to the final cost of their grocery purchases – but researchers found that listing the (unchanged) tax visibly on an item’s price tag decreased consumer uptake of that item.

Choice avoidance is real. I’ll just quote: “Marianne Bertrand et al. (forthcoming) examine the impact of a small or large menu set in the context of an experiment on the mailing of 50,000 loan offers in South Africa. The authors randomize, among other things, the format of the table illustrating the use of the loan. The small-table format lists only one loan size as an example, while the big-table format presents four different loan sizes. The finding is consistent with the choice avoidance results. The take-up in the small-table format is .6 percentage points larger compared to a baseline of 8 percentage points, an effect size equivalent to a reduction of the (monthly) interest rate by 2.3 percentage points.”

Both of these points made me think about striking a balance in microfinance marketing. On the one hand, it’s clearly preferable to phrase information in ways that are transparent (no invisible costs) and understandable to clients (so probably discussing interest as a fee rather than an annualized percentage). On the other hand, however, it’s also important not to overwhelm potential clients with information – especially those for whom microfinance is a first, and likely intimidating, foray into the formal financial system. So the responsible MFI must figure out – what aspects of their products are clients really paying attention to? And how do you tell people about them in a way that’s transparent, but also compelling?

I think there’s an obscure parallel here to David Roodman’s recent post on microfinance as institution building – namely, that doing better sales, marketing, client outreach, whatever you’d like to call it is a step towards building commercially viable financial systems for the average residents of developing countries. A large part of this is that product design is at the heart of marketing, and, as Portfolios of the Poor amply demonstrated, microlending could use a revolution or ten in the design of its products. But I also partly feel like an attention to marketing – to why microfinance clients take or refuse the loans that they do – would indicate that the financial sector is starting to take the poor seriously as financial decision-makers, as valid and valued clients of a non-exclusionary financial system. That’s what I’d really like to see.